AHOLD TO EXPAND INTO FOOD-SERVICE DISTRIBUTION

ELLIOT ZWIEBACH

ZAANDAM, The Netherlands -- Ahold here said last week it will expand its U.S. operations into the area of institutional food service with the pending acquisition of U.S. Foodservice, Columbia, Md., the nation's second largest food-service distributor.

Ahold said the acquisition will provide it with a second platform for growth and should prove "highly valuable" for its existing retail store base.

"The synergies between food service and food retail are many, and we intend to exploit these to the highest degree possible," Cees van der Hoeven, president and chief executive officer of Ahold here, said last week.

Ahold said it will acquire U.S. Foodservice for $26 per share in cash, or approximately $3.6 billion, including $925 million in debt. The deal is expected to close in May.

Combining U.S. Foodservice's projected annual sales of $7 billion with Ahold USA's anticipated 2000 sales of $23 billion will make Ahold USA a $30-billion multichannel food provider, the company said.

In financial results announced last week, Ahold said sales were up 27% to $32.2 billion, and net earnings jumped 37% to $720.6 million for the year ended Dec. 31; for the 12-week quarter sales were up 13% to $5.9 billion, and net income rose 36% to $227.3 million.

The company said sales in the U.S. rose 26% to $20.3 billion for the year -- due primarily to the consolidation of Giant Food, Landover, Md. -- while operating income rose 40% to $1 billion; for the 12-week quarter U.S. sales increased 4% to $4.9 billion, while operating income rose 21% to $266.6 million.

According to Ahold, the pending acquisition of U.S. Foodservice will result in several benefits, including the following:

It will make Ahold USA a national player, with U.S. Foodservice operating 40 distribution centers serving 85% of the U.S. population, primarily along the Eastern Seaboard, the Northeast, the West Coast, Texas and Oklahoma. Ahold said the acquisition will add "a new strategic and complementary marketing channel for food and related products, [and] there is considerable potential to blend Ahold's U.S. food store operations with the institutional food-service market, offering benefits to all parties involved."

It will provide synergies with Ahold's two existing food-service operations -- Deli XL, a wholly owned Dutch subsidiary, and ICA, Ahold's prospective food-service partner in Sweden. Ahold said the addition of U.S. Foodservice sales to the other two food-service operations will give the company approximately $9 billion in foodservice sales.

It will provide Ahold with an established e-commerce link -- one that includes home delivery -- based on the Web site U.S. Foodservice launched last November at www.nextdaygourmet.com. Ahold said e-commerce is expected to generate sales of approximately $100 million annually.

"E-commerce is very promising," van der Hoeven said last week, "with U.S. Foodservice having a very well-developed business-to-business concept along with fast-growing business-to-consumer applications. Our company is totally dedicated to rolling out e-commerce and Internet shopping on a global basis."

It will provide Ahold with a line of signature brand products "with considerable potential for synergies with retail operations," the company said. U.S. Foodservice's signature lines include Roseli, Cross Valley Farms, Rituals, Harbor Banks and El Pasado Authentic Mexican Cuisine With a Touch of the Past.

It will provide the combined operation with synergies and cost savings -- in procurement, logistics and distribution, information technology and private-label development -- that are expected to amount to at least $75 million by 2001, the company said. "Our stores will also benefit, as food service is becoming an integral part of our offering," the company added.

Ahold's decision to broaden its acquisition scope beyond retail chains on the East Coast follows its failure earlier this year to complete its acquisition of Pathmark Stores, Carteret, N.J.

Gary Giblen, portfolio manager for First New York Securities, New York, said a stricter attitude by the Federal Trade Commission may have prompted Ahold to look elsewhere for acquisition growth.

"Ahold has good disciplines, and it isn't limiting itself to supermarket acquisitions -- and it already has a food-service operation in the Netherlands," he pointed out.

While Ahold may find some synergies between its retail and food-service operations, "food service is really a different business," Giblen said, "although it might be beneficial for a food retailer to have some expertise in food service as the two come together."

Asked if Ahold might opt to use the U.S Foodservice distribution centers to ship groceries to retail stores, Giblen said he doubted that would happen "because those centers are set up for different distribution patterns, with smaller pallet loads."

Jonathan Ziegler, managing director for Deutsche Banc Alex. Brown, San Francisco, said Ahold may have sought an acquisition other than a retail chain "because dealing with the FTC was such a frustrating experience. Or perhaps other retail acquisition targets that Ahold was interested in weren't available.

"But Ahold had already acquired Gastonoom, an institutional food-service company in the Netherlands, a few months ago and apparently a light bulb went on and Ahold saw how related that business is to retail food distribution."

Ziegler said he expects the addition of U.S. Foodservice will help Ahold with best practices in its existing supermarket businesses.

The acquisition also gives Ahold a presence west of the Mississippi for the first time, Ziegler pointed out. "It opens a whole new geography for Ahold, which will enable the company to gather information on new markets and perhaps provide expansion potential for food chains or restaurants all over the U.S."

Van der Hoeven said the planned acquisition is "fully in line with our growth strategy and our ambition to become the world's best multichannel food provider. Critical mass and economies of scale, along with new synergies, will positively impact all our businesses."

According to Bob Tobin, president and CEO of Ahold USA, Chantilly, Va., "We now have direct access to the rapidly expanding U.S. food-service market and enter this new business channel in a prominent position.

"We see food service complementing our operations in a natural way, with some of U.S. Foodservice's activities also proving highly valuable for our existing stores.

"This acquisition opens up a new growth corridor and elevates us from the position of supermarket operator to multi-channel food provider. The distribution and marketing network across the U.S. adds tremendous value to our company, including the e-commerce business with home delivery."

Ahold said its interest in food service is confirmed by statistics that show Americans are spending nearly as much on food purchases for home consumption as for food eaten away from home -- $365 billion versus $367 billion, respectively, in 1999.

U.S. Foodservice was founded in 1997 when JP Foodservice and Rykoff Sexton merged. The company expanded last year with major acquisitions in New York and southern California; its major customers include Buffet's, Perkins Family Restaurants, Subway, Pizzeria Uno, Ruby Tuesday and Chili's.